Diversified manufacturer Eaton Corp posted a higher-than-expected quarterly profit on Monday, citing cost cuts, early signs of recovery in its markets and a boost from the weak U.S. dollar, sending shares up 5 percent.

Eaton, a maker of hydraulics, electrical control systems and truck transmissions, raised its full-year profit forecast.

The company reported third-quarter net income of $193 million, or $1.14 per share, down from $318 million, or $1.87 per share a year earlier.

Excluding acquisition-related charges, Eaton earned $1.21 per share.

Sales fell 26 percent to $3.03 billion from a year earlier, but were up slightly compared to the preceding quarter.

Analysts, on average, were expecting Eaton to earn 92 cents per share, on sales of $3.13 billion, according to Thomson Reuters I/B/E/S.

The company, which cut 10 percent of its workforce in 2008, benefited from sharply lower costs. Its cost of goods sold fell 27 percent to $2.2 billion, while selling and administrative expenses were down 16 percent. Chief Executive Sandy Cutler has argued cost cuts need to come as early in a downturn as possible.

Eaton said it expected the economic recovery in its early-cycle markets to continue. It said global auto production was improving, helped in part by government stimulus programs, and demand in the heavy-duty truck market was also improving.

It forecast full-year operating earnings in a range of $2.40 to $2.50 per share, up from its earlier forecast of $2 to $2.20 per share. Analysts were expecting it to earn $1.99 for the full year.

The improved outlook suggests Wall Street may have to raise its forecasts for Eaton's 2010 earnings, Goldman Sachs analyst Terry Darling said in a research note.

Eaton shares were up $3.05 at $63.47 in morning trade on the New York Stock Exchange.

(Reporting by Nick Zieminski; Editing by Derek Caney, Maureen Bavdek, Dave Zimmerman)

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